CISI IoI Collective Investment Schemes

Question 1

What is a 'collective investment scheme' (CIS)?

Accepted Answer

A pooled investment vehicle where many investors' money is combined and managed collectively to invest in a diversified portfolio

Answer

A CIS pools money from multiple investors, which is then invested collectively by a fund manager in a diversified portfolio of assets. This gives smaller investors access to diversification and professional management that they could not achieve individually.

Question 2

What is the difference between an OEIC and a unit trust?

Accepted Answer

Both are open-ended funds but OEICs are structured as companies and have a single price; unit trusts are structured as trusts and have a bid-offer price spread

Answer

Both are open-ended funds that expand or contract as investors buy or sell. The key differences: OEICs are structured as investment companies with a single pricing structure; unit trusts are structured as trusts with a bid-offer spread. OEICs have largely replaced unit trusts in the UK market.

Question 3

What does 'open-ended' mean in the context of a fund?

Accepted Answer

The fund can create new units/shares and redeem existing ones in response to investor demand, meaning the size of the fund expands and contracts

Answer

An open-ended fund creates new units (or shares) when investors subscribe and cancels them when investors redeem. The fund size therefore changes with investor demand. This contrasts with closed-ended funds like investment trusts, which have a fixed number of shares.

Question 4

What is a 'closed-ended' fund and how does it differ from an open-ended fund?

Accepted Answer

A closed-ended fund has a fixed number of shares listed on a stock exchange; investors buy and sell shares in the secondary market rather than subscribing to or redeeming from the fund manager

Answer

A closed-ended fund (such as an investment trust) has a fixed number of shares listed on a stock exchange. Investors buy and sell shares in the market rather than dealing directly with the fund. The fund size is fixed, so the share price can trade at a premium or discount to the net asset value (NAV).

Question 5

What is the 'annual management charge' (AMC) in a fund?

Accepted Answer

The annual fee charged by the fund manager for managing the portfolio, expressed as a percentage of the fund's assets

Answer

The AMC is the recurring annual fee for managing the fund, deducted from the fund's assets. It is expressed as a percentage (e.g., 0.75% per year). Together with other expenses, it forms part of the Ongoing Charges Figure (OCF).

CISI Introduction to Investment Practice Test

CISI Introduction to Investment Practice Test

CISI IoI Collective Investment Schemes